Stitch Fix (SFIX) will soon do an IPO. Stitch Fix is a new way to sell clothes.
A highly personalized selection of clothes for you to try on in the comfort of your home. Keep what you like and return the items you don’t in the same box you received with a prepaid return shipping label.
Very easy and very successful.
But Stitch Fix’s success in its new way to sell gets a boost from an extremely old human social quirk.
Stylists’ Effort
The company, through your personal stylist, sends you a box of clothes, a “Stitch”. The clothes are based on your pre-determined preferences and refined over time through your feedback. But the refining process does not rest solely on your personal stylist.
Stitch Fix employs its own algorithm to help your stylist determine which clothes you would like best and which ones you are most likely to buy. The data points feeding this algorithm get as granular as to the shape of the shirt’s chest pocket. And probably even more granular than that.
From Stitch Fix (SFIX) S-1
But the customer doesn’t see or interact with the algorithm nor the fulfillment center that puts the clothes in the box.
The customer interacts with their personal stylist.
When a customer receives their “Stitch” it comes with a personal note and styling options. The implication is your stylist put a lot of time and effort into personalizing your box. (They probably did. I don’t know their full work process)
From your perspective, your stylist did a big favor for you.
You feel the need to repay their favor.
Reciprocation Bias
From Farnam Street.
whenever receiving a favor, you too feel an immense need, almost an obligation, to pay it back in kind.
The most obvious way to repay your stylist is to purchase the majority of the clothes they sent you.
And probably buying more than you initially said you would.
New Clients Spend the Most
The amount of “spend” from a new Stitch Fix customer occurs in the initial six months of joining.
The cohort data also shows that client spend has, on average, been higher the first six months of a client relationship than the second six months, and that the spend during a cohort’s first year is higher, on average, than the second year.
Stitch Fix goes on to say that they think the slow down in spend after the first 6 months and the first year is due in part to stocking. The customer has a lot of clothing needs when they first sign up. Then demand drops as their immediate wardrobe needs are filled.
I would add that the reciprocation bias, the feeling the customer has to repay their stylist, has worn off.
The customer realizes it is a business transaction, not a favor. The client becomes pickier about what they’ll keep. They’re more willing to send the majority of the clothes back.
Currently, Stitch Fix has high repeat purchase rates with an 83% rate in 2016 and a 86% rate in 2017. The bulk of Stitch Fix’s clients, 1,327,000 out of the current 2,194,000 active, have been added within the last year.
I am interested to see how Stitch Fix’s repeat rate trends over time as client acquisition rates slow down, as each yearly cohort ages, and the reciprocation bias wears off
